2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us"

 

Statistical analysis without establishing the meaning of a particular economic activity cannot tell us what is going on in the world of human beings. All the statistical analysis can do is to describe things; it cannot explain, however, why people are doing what they are doing. Without the knowledge that human actions are purposeful, it is not possible to make sense out of historical data—Dr Frank Shostak 

In this issue

2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us"

I. PSE’s Stock Market Accounts Hit a Record 1.9 million

II. Differentiating Growth Rate from a Growth Trend, The Digitalization of the Philippine Stock Market 

III. It is the Active Accounts that Matter: Reaching an All-Time Low!

IV. PSEi 30’s Bear Market: Reduced Participation Rate, and Diminishing Volume; Age Distribution of Participants Suggests a Worrisome Trend!

V. Stock Market Doldrums Brought About by Savings Drought Manifested in Banking Data and Market Manipulation

VI. 2024 5-Month Volume and Market Breadth Exhibits Oversold Conditions

VII. Symptoms of Market Distortions and Inefficiencies: An Examination of Market Dominance by the Top 10 Brokers and PSEi 30's Top 5 Issues

VIII. BSP Chief Remolona on Foreign Money: "I Do Not Know Why They Do Not Like Us"

2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us" 

The PSE registered an 11.3% growth in stock market accounts in 2023, but active accounts fell to an all-time low, supported by a dearth in volume. The BSP Chief questions why foreign money continues to elude the Philippines, highlighting the challenge facing local investors. 

I. PSE’s Stock Market Accounts Hit a Record 1.9 million 

Inquirer.net, May 29, 2024: Stock market accounts rose 11.3 percent to 1.906 million in 2023  from 1.7 million in the previous year, according to the Philippine Stock Exchange’s (PSE) annual Stock Market Investor Profile report. The growth was mainly due to new accounts opened through the GStocksPH platform, which also pushed the share of online accounts to 80 percent of total stock market accounts. Online accounts stood at 1,525,768 as of end-2023, up 21.2 percent or 266,861 accounts.

Figure 1

The headlines provide the good news: a surge in new stock market accounts. This surge was highlighted by PSE's infographics, which emphasized "growth." (Figure 1, topmost table) 

We'll take it further.

In the context of peso nominal gains, the 193,285 increase in 2023 marked the largest after 2021 and 2018. (Figure 1, middle chart)

The upsurge in new accounts has increased the stock market's penetration level to a record 1.7% of the population (using GDP calculations). (Figure 1, lowest graph)

Or, this represents an unprecedented 2.44% of the population over 15 years old and 3.7% of the labor force (PSA labor survey).

However, there's a catch. If so, why has the PSE's volume been falling?

II. Differentiating Growth Rate from a Growth Trend, The Digitalization of the Philippine Stock Market

Let's dig deeper to understand the underlying factors.

The reason is that new accounts are only one part of the equation.

Figure 2 

First, the headlines only reveal the growth rate, but they don't reveal the growth trend. The fact is that since peaking in 2018, the growth trend has been on a decline. (Figure 2, topmost chart) 

2023 could be seen as a countercyclical bounce, possibly driven by a shift to a mobile application trading platform similar to the US Robinhood Markets. 

As evidence of the marked transition towards a digital economy, the share of online trading hit an unmatched 80% of the total. This growth was accompanied by a 21.2% YoY increase. (Figure 2, middle image)

In contrast, traditional brick-and-mortar accounts saw a significant decline in 2023. This decline was marked by a contraction of -16.2% YoY and a share drop from 26.5% to 19.95%. (Figure 2, lowest graph)

This shift towards online trading is reflective of the industry's broader trend towards digitalization, which has been driving the growth of new accounts.

As we explore this trend further, we will delve into its implications for the sell-side industry's future.

III. It is the Active Accounts that Matter: Reaching an All-Time Low!

Returning to the paradox of the record new accounts amidst declining volume, a more pertinent metric is "active accounts."

Figure 3

Consider this: while the total number of active accounts represents 17.6%, online accounts make up 19.3%. This means that in total, there are only 335,459 active accounts—a historic low! (Figure 3, topmost table and middle window)

Interestingly, the retail segment experienced a lesser decline compared to institutional accounts. Retail active accounts dropped from 20.1% to 17.6% of the total, while institutional accounts plummeted from 23.7% to 20.5%.  (Figure 3, lowest graph)

In nominal figures, retail accounts decreased by 2.2%, while institutional accounts saw a significant dive of 22.53% 

The PSE numbers didn’t specify whether the new accounts were included in this year’s active accounts or if the active accounts represented last year’s total numbers.

However, if it's the former case, then nearly 58% of the new accounts are part of the active ones! If this holds true, will they, like their predecessors, fade soon?

IV. PSEi 30’s Bear Market: Reduced Participation Rate, and Diminishing Volume; Age Distribution of Participants Suggests a Worrisome Trend!

Figure 4

Like day follows night, the declining participation rate has characterized the PSEi 30’s bear market in disguise. 

Since its climax in 2017, the PSEi 30's (end of year) downtrend has resonated with the corrosion of the growth of total accounts. 2023’s 11.3% marked the second-lowest YoY growth rate since 2017.  Notably, this growth rate was achieved from a very low base. (Figure 4, topmost chart) 

The decline in participation rates can also be attributed to the poor returns from investing in the PSE, as many investors became "long only," and wary of taking risks after experiencing prolonged losses. (Figure 4, middle pane) 

Moreover, diminishing volume has accompanied the PSEi’s 30 bear market. (Figure 4, lowest diagram)

Figure 5

Interestingly, among age groups, while millennials suffered the most decline in participation, followed by Gen X, it was the seniors who provided the most growth in total accounts. Senior accounts soared from 10.8% to 14.8%!  (Figure 5, topmost table)

That online accounts dominated the total was also manifested in the age distribution. The boomers, who in the past years (except 2021) have shied away from online accounts, became the largest growth sector, surging from 5% to 10.9%. (Figure 5, second to the highest table)

On the other hand, millennials, who composed the bulk of the age grouping, endured a substantial contraction, from 55.7% to 49%! Part of Gen Z helped in the increase from 20.8% to 21.5%.

This reveals a lot about income and savings conditions. It likely exposes that the 30-44 age grouping must have endured most from the decaying conditions in real income and savings, hence their participation pullback in the PSE.

It also manifests that under the current high inflation environment, the age group with the most savings, the seniors or boomers, were driven to scour for yields in the stock market. They braved the challenges of learning to use digital platforms for trading to gamble.

The thing is, a savings drought, which brought about the PSEi 30’s bear market, has been manifested by the decaying gross volume or turnover, which reverberated with the decrease in the participation rate. 

Needless to say, a restoration of savings should anchor a comeback of a healthy bull market—similar to the pre-2013 era. Without it, everything else represents a juvenile belief in unicorns, the tooth fairy, or castles in the sky or false optimism and unsustainable trends.

V. Stock Market Doldrums Brought About by Savings Drought Manifested in Banking Data and Market Manipulation

Symptoms of the deterioration of savings have similarly been manifested in the banking system. The 10-year decay of the bank’s deposit liabilities or cash-to-deposit ratio reveals a lot about inflation and malinvestments via asset bubbles ravaging savings. (Figure 5, second to the lowest and lowest charts)

Figure 6

The Warren Buffett Indicator—market cap divided by the GDP—also exhibits this deviation. The PSEi 30’s declining ratio demonstrates the bear market in motion. (Figure 6, topmost graph) 

Additionally, since debt has anchored private and public activities, it bloats the GDP. Therefore, the overstated GDP performance inflates this market cap-to-GDP ratio.   Furthermore, the rising Consumer Price Index (CPI) has coincided with the decline of the ratio, indicating that inflation has been a major hindrance (a menace) to the financial economy. 

That’s not all.

Massive "marking the close" pumps and dumps have contributed to the intensifying mispricing of the local stock market. Basic economics tell us that price controls lead to either shortages or gluts. The same holds true for the stock market. 

Friday’s massive 1% "mark the close" pump came about from the top 10 brokers who were responsible for 80% of the transactions. End session pumps and dumps have become a common feature in the PSEi 30. (Figure 6, second to the highest charts)

The essence of the stock market is its pricing mechanism in the titles to capital. 

The gaming of the index, thereby, percolates or radiates to the economy via misallocations of capital brought about by these pricing distortions. It exacerbates malinvestments from monetary policies and other forms of interventions—which of course, would be revealed over time. 

At the very least, all these contribute to the erosion of savings. 

VI. 2024 5-Month Volume and Market Breadth Exhibits Oversold Conditions 

Many have come to the conclusion that the PSE’s turnover has been improving. 

That may be partially true. While May’s volume jumped 25.6% YoY—helped by the Month-end marking the close pump—following April’s 71.12% surge, the 5-month aggregate turnover declined 6.2% from last year. (Figure 6, second to the lowest image) 

The two-month surge has barely offset the declines of the early months. 

Sure, market breadth has exhibited signs of improvement. The 2024 5-month advance-decline spread marks the lowest since 2019. (Figure 6, lowest diagram)

In a nutshell, despite the PSE’s cheerleading via the headline numbers, the depressed turnover, and low participation rates backed by improving partial market internals exhibit oversold conditions. 

VII. Symptoms of Market Distortions and Inefficiencies: An Examination of Market Dominance by the Top 10 Brokers and PSEi 30's Top 5 Issues"

Still, the current environment has been a product of loose financial conditions, which means more pressure on the PSE should conditions tighten. 

However, the ever-dithering BSP would likely tolerate or gamble with "higher for longer" inflation than tighten monetary conditions due to unsustainable debt conditions. 

Furthermore, the sluggish turnover also implies increasing stress on the sell-side (brokerage) industry. According to the PSE, there are 122 trading participants, 37 of which have online platforms. 

But here's the rub: the top 10 brokers capture a vast majority of daily transactions. Most of them represent institutional brokers—possibly accounts of banks and other financial institutions.

Figure 7

Last week, the average soared to 63.4%, mainly due to Friday’s mark-the-close pump, where the top 10 brokers accounted for a staggering 80% of the Php 22 billion trade! (Figure 7, topmost visual) 

The limited distribution of transactions to a select number of brokers highlights the extent of concentration of activities or "market dominance" in the stock market, which is equally reflected in the dispersion of weightings in the PSEI 30’s free-float market capitalization. 

The aggregate free-float cap of the top 5 issues hit a record 51.92% last April 19th! (Figure 7, second to the highest image) 

These phenomena are all manifestations of distortions: market inefficiencies, imbalances and irregularities. 

As an aside, financial services accounted for 15% share of the retail accounts in 2023. This suggests that a substantial share of direct retail transactions involves those who sell "financial services" (buy and sell side), potentially leading to many principal-agent problems. 

By inference, our guess is that many traditional retail brokers are on the threshold of survival. 

Ironically, the PSE brags about the headline numbers of stock market accounts, while there appear to be ZERO takers of its short-selling program since its inception. 

Also, since the start of its Volume Weighted Average Price (VWAP) trading program last March 1, total transactions amounted to only Php 415.435 million. 

These new programs have had little or no impact on the sell-side industry. 

Yet, the BSP and PSE’s policies will continue to haunt savers while applying pressure to the sell-side industry. 

In my humble opinion, the PSE aims to consolidate the brokerage industry by reducing the number of brokers (or competition) and favoring a few larger players—to increase its control. 

VIII. BSP Chief Remolona on Foreign Money: "I Do Not Know Why They Do Not Like Us" 

In a surprising twist, the BSP chief expressed concerns about the lack of depth in the PSE, citing the limited foreign participation as a key factor contributing to its lack of international recognition. (bold mine) 

And finally, we have our missing portfolio flows. We used to fear portfolio flows because we saw them as hot money. They come in and leave at the first sign of trouble.

But these days, they are not so scary. In the first place, they are so negligible these days; they can come in and out, and it will not matter. 

But the big thing is the game has changed; the intent is not into active investment anymore; it is in passive investment. Passive means you buy the index. At least at the core of your portfolio, you need an index. Maybe you can play around on the sides of your portfolio, but the core has to be an index. 

Huge trillions of dollars are now flowing into the major equity indices, global equity indices, and the major primary bond indices. I think we are in a few indices. We talked to Vanguard, and they said we are about 0.1 percent of their bond index. 

But we are not in any major equity indices, BlackRock or State Street. We do not know why; people say it is our withholding taxes, but we are not sure what is going on. 

Bakit hindi tayo kasali? The smaller markets are in these indices. Colombia is in that index. Etsepuwera tayo, hindi tayo kasali. I do not know why they do not like us.​ (Remolina, 2024) 

This lack of understanding (incredible cluelessness) and the tendency to blame foreign investors for the country's financial issues is striking. 

Yet, as an old Wall Street Maxim goes, "Money goes where it is treated best." 

The Philippine authorities and private regulators should reflect or self-examine on whether they have been creating an attractive environment for investors or if they have been providing money with a red-carpet treatment or not.  The Philippine Stock Exchange is a monopoly with self-regulatory powers. 

The questions to ask: has the BSP’s inflation targeting regime, a "trickle-down policy, " successfully diffused to build up savings for the average Pedro and Maria? 

Or has it supported the debt-financed Keynesian "build and they will come" policy framework benefiting the elites and the government while consuming the savings of the general populace through the economic maladjustments as evidenced by the record savings-investment gapsavings-investment gap? 

In essence, have their policies been supportive of local savers and conducive to the industry? 

The crux: If they can’t draw local savers into the capital markets (bonds and stocks), why would foreigners follow? 

Foreign portfolio flows into the Philippines have declined significantly since 2013. (Figure 7, second to the lowest graph) 

The Philippine bond market is one of the smallest in Asia, which is likely why foreign flows have been limited. (Figure 7, lowest chart) 

Then why blame foreigners for "not liking" the Philippines?

____

References

Dr Frank Shostak, Can Data by Itself Inform Us about the Real World? May 27, 2024, Mises.org

Philippine Stock Exchange, STOCK MARKET INVESTOR PROFILE 2023, May 2024, PSE.com.ph

Eli M Remolona: The challenges we face at Bangko Sentral ng Pilipinas, Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Membership Meeting of the Financial Executives Institute of the Philippines, Makati City, 6 March 2024. April 16, 2024, Bank for the International Settlements

 

 

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

 

Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left— Zoltan Pozsar

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

In this issue

I. The Strong US Dollar and the Weak Philippine Peso

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation"

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

VI. Soaring External Debt Means Surging USD "Shorts"

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

IX. Will a Weak Peso Boost Exports While Hampering Imports?

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators"

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits 

As the USD Philippine peso soared to an 18-month high, the BSP points blamed "speculators" for the surge. However, this finger-pointing constitutes a smoke-screen.

I. The Strong US Dollar and the Weak Philippine Peso

Figure 1 

The US dollar index ($DXY) rose by 0.26% this week. The USD increased against most Asian currencies, with the exception of the Indian rupee ($INR), which fell by 0.29%. The INR benefited from inflows into its manic stock markets, a record $25 billion central bank payout to the government, and an all-time high in international reserves (as of May 17). (Figure 1, top and middle windows)

For the week, the USD surged the most against the Thai baht ($THB) by 1.6%, the South Korean won ($KRW) by 1.05%, and the Philippine peso ($PHP) by 0.99%.

Despite a massive $58 billion support and repeated threats to intervene by the Bank of Japan (BoJ), the Japanese yen fell by 0.9% week-on-week (WoW), with $USDJPY approaching 157, just slightly below 158, which represented a 34-year high reached at the end of April 2024.

Year to date, down by 5%, the PHP signified the region’s fifth weakest currency after the JPY (11.3%), THB (7.2%), KRW (6.1%), and the Vietnamese dong ($VND, 5.7%). 

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation "

 The USDPHP reached Php 58.27, an 18-month high, on May 21st. 

Echoing the BoJ, the Philippine BSP chief implicitly chided speculators: The dollar continued to strengthen as the Federal Reserve signaled delay in cutting interest rates. The BSP continues to monitor the foreign exchange market but allows the market to function without aiming to protect a certain exchange rate. Nonetheless, the BSP will participate in the market when necessary to smoothen excessive volatility and restore order during periods of stress. (Businessworld, 2024)

In contrast to the BSP declaration, out of the 28 USD crosses, 13 were positive, and the USDPHP outperformed that day, according to Exante Data.

Further, while the BSP’s "plausible deniability" did not mention interventions, two days later, newswires reported that the monetary authority did support the peso: Mr. Remolona said that the central bank intervened by small amounts on Tuesday, when the peso sank to the P58 level for the first time in over 18 months or since Nov. 10, 2022. (Businessworld, 2024)

Even more, news also indicated that even before last week’s USDPHP’s November 22 high, the BSP had already been carrying out operations in support of the peso as early as May 7.

The BSP has been warning speculators since last April, or in June 2022, when the USDPHP was at 54.8!

Media suggests that the BSP’s shift from "hawkish" to "dovish" sentiment could have been the factor, yet the BSP remains adamant: Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. remains unfazed by the hawkish signals from the US Federal Reserve, saying the BSP’s monetary policy decisions will be guided primarily by the Philippines’ own economic data rather than the Fed’s moves. (Inquirer, 2024)

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

The BSP’s predilection in easing policy rates regardless of the US Federal Reserve’s stance is an exposition—it suggests that the Fed was a convenient pretext to justify the current monetary stance of local authorities. The BSP would readily abandon it when politics so determined.

To boost the economy, the BSP chief proposes to cut rates by 50 bps in the second half of 2024, possibly starting this August.

Nonetheless, typical of central banks, markets supposedly function as the culprits for any economic maladjustments—and not policymakers. They assume the role of Gandalf the Grey/White (in the Lord of the Rings series), setting boundaries against the adversary. 

In the Fellowship of the Ring, Gandalf commanded the demon Balrog against crossing the Bridge of Khazad-dûm, 'You shall not pass!' At least, Gandalf emerged victorious in his battle against the Balrog. 

On the other hand, the USDPHP could be considered a trend with Lindy characteristics. The Lindy effect is the "idea that the older something is, the longer it's likely to be around in the future" (Waschenfelder, 2021). In a word: time-bounded resilience. (Figure 1, lower image) 

Since gaining independence from the US, the Philippine peso has been pegged to the USD at Php 2. However, the defunct Central Bank of the Philippines (CBP) experimented with currency decontrols and reestablishment of controls until its dissolution and the establishment of the Bangko Sentral ng Pilipinas (BSP) in July 1993, which then adopted a managed float system (Wikipedia). 

In any case, from the CBP to the BSP, the USDPHP has remained on a 54-year uptrend, with periodic countercyclical movements. 

It's also no coincidence that the emergence of the USDPHP bull market has coincided with 'the Nixon Shock' in August 1971, which marked the end of the Bretton Woods system (dollar fixed to gold but gold was allowed only for international exchange—WGC) or the transition to the incumbent US dollar standard, the primary currency reserve for the global economy (CFR, 2023).

The thing is, the drivers of the USDPHP bull market from the past remain principal factors today, or even worse—meaning they should reinforce its bull market. 

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt 

Why would the BSP insist on cutting rates ahead of the Fed? 

First and foremost, the BSP may be aware that the GDP represents a mirage—it is weaker than advertised. This notion has been supported by the Q1 2024 financial performance of the PSEi 30. 

Naturally, with firms heavily reliant on credit, higher rates pose risks to both the GDP and the banking system. 

Secondly, and more importantly, public debt repayments and refinancing have been skyrocketing. 

Figure 2

Four-month public debt servicing soared by 49% to a historic Php 1.15 trillion, bolstered by interest payments (38.4%) and amortizations (52.4%). Though 82% of it accounted for local currency-denominated liabilities, it was lower than last year’s 84.9%, which means foreign obligations filled the rest. (Figure 2, topmost graph)

The four-month carrying cost of published public debt was just 28.3% off the annual or last year’s all-time high! "Higher for longer" translates to even more debt repayments and refinancing on the back of higher repricing. (Figure 2, second to the highest graph)

Though the mainstream rejoiced at April’s fiscal surplus, brought about by the record revenues of Php 537 billion as a result of the annual tax filing, non-tax revenues, which comprised 41.6% of the total, delivered the substance. 

Non-tax revenues more than doubled (114%) while BIR revenues grew 12.7%. For most years, surpluses signified a seasonal feature of April—again in response to the annual tax filing.

And yet, public spending surged 32.3% to Php 494.5 billion.

In a nutshell, due to non-tax revenues—partly from dividends of Government-Owned and Controlled Corporations and "one-off remittance of disposition proceeds from the Bases Conversion Development Authority (BCDA)"—deficit spending was moderated.

Ironically, despite this, the cumulative four-month fiscal deficit swelled by 12.7% year-over-year—the third-largest—as the Bureau of Treasury drew from its cash reserves (-20.4%) and reduced its borrowing (-23%). The drain of liquidity likely means a tsunami of borrowings going into the year-end. (Figure 2, second to the lowest chart)

Figure 3

And yet, the USDPHP has tracked the uptrend in public spending, and subsequently, the fiscal deficit. (Figure 2, lowest chart and Figure 3, topmost graph)

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

Naturally, deficit spending requires financing. How? 

Aside from taxes, the government draws from the public’s savings. Therefore, the uptrend in USDPHP also reflects the "unstoppable" bull market in public debt. (Figure 3, second to the highest image)

Due to the insufficiency of public savings, financial authorities have resorted to the "monetization " of public liabilities.  

The acceleration of the USDPHP also echoes the rise of the BSP’s net claims on the central government (NCoCG). (Figure 3, second to the lowest graph) 

For possible public relations (PR) goals, monetary authorities limit the expansion of their balance sheets. Instead, they rely on the banking and financial system to implement their objectives. 

Consequently, the USDPHP likewise manifests the inflationary credit expansion of the banking system through the monetization of public liabilities. All-time highs in bank holdings of NCoCG should eventually impact the USDPHP. (Figure 3, lowest window) 

Additionally, record bank holdings of NCoCG have also aligned with their historic Held-to-Maturity (HTM) assets, which escalates the siphoning off of liquidity in the system.

VI. Soaring External Debt Means Surging USD "Shorts " 

Hold it, because there’s more.

The government has borrowed not only to fulfill the FX requirements of the economy but also to meet the BSP’s balance sheet target.

Figure 4

Though financial authorities have relied on domestic borrowings to bridge their financial chasm, external borrowings have also been accelerating. In Q4 2023, it grew by 12.4% to a record USD 125.4 billion. (Figure 4, topmost chart) 

Historic fiscal deficits have reflected the surge in external debt. (Figure 4, second to the highest graph) 

The public sector, with a 58% share as of December 2023, has accounted for a vast majority of the total. (Figure 4, lowest window) 

Since external borrowing has grown faster than the published Gross International Reserves (GIR), the debt stock has now surpassed the purported reserves. That being said, do these appear to be 'ample reserves' to defend the peso? (Figure 4, second to the lowest image) 

Furthermore, the intensified increases in external debt have also contributed to USD "shorts."

Figure 5

While the government can inflate away its domestic debt, paid for by the loss of purchasing power of the citizenry, this would magnify the real value of FX debt—or require more pesos to finance FX operations. (Figure 5, topmost visual) 

So why shouldn’t the USDPHP be higher?

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

The grapevine suggests that the Philippine peso could benefit from weakness or even a "collapse" in the US dollar.  

However, the facts tell a different story.

Presently, the world operates under a de facto US dollar standard, where US dollar reserves serve as an anchor for domestic currency and monetary operations. 

As a share of its balance sheet, the BSP have built its international reserve holdings from 31% in 1993 to 85% in 2010.  (Figure 5, second to the highest pane) 

The BSP have maintained its FX holdings in a tight range of 85% to 87% until 2019.  The BSP's local monetary operations have been closely tied to these reserves. This reliance has led to a rising share of currency issuance compared to liabilities. (Figure 5, second to the lowest graph) 

The buildup of FX reserves fueled a 9-year countercyclical rebound (2004-2012) in the Philippine peso. It hallmarked the "salad days" for the Philippine peso. 

This period also witnessed a reduction in the share of currency issuance, representing an implicit cleanup of both government and private sector balance sheets. 

However, this changed following the Great Recession in 2007-2008, when the BSP, like its global peers, lowered rates to stimulate credit expansion and mitigate economic weaknesses. This marked the beginning of the era of easy money.

Fast forward to the present, a massive injection into the financial system amounting to Php 2.2 trillion, or about 11% of the GDP, signaled an emergency monetary response to the pandemic crisis. 

This significantly inflationary operation resulted in a substantial decline in FX reserves, indicating that the government has been printing more money than its FX anchor permits. 

Given these factors, why shouldn't the USDPHP rise? 

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

Through a gradual buildup of net foreign assets, the BSP has been attempting to restore its previous range of FX reserves. However, the growth rates of BSP's GIR and banks' FX assets have been slowing significantly. In contrast, the BSP's net foreign assets continue to expand.

Figure 6

The BSP has been relying less on its FX holdings for its GIR operations, as evidenced by the declining trend. (Figure 6, topmost graph)

Since 2018, the BSP has modernized, utilizing Other Reserve Assets (ORA) such as swaps, repos, and other short-term loans to boost its reserves. From a peak of 12.5% in January 2023, ORA accounted for 5.3% of the GIR as of March. (Figure 6, second to the highest window)

Interestingly, despite record gold prices, the BSP has been selling off its gold reserves, leading to a decrease in physical metal holdings. (Figure 6, second to the lowest chart)

However, thanks to record USD gold prices, this has bolstered the headline value of the GIR.

In short, the headline GIR conceals its actual state through the use of 'borrowed reserves.' 

Even with borrowed reserves, the rising USDPHP has stalled GIR growth. (Figure 6, lowest image)

Figure 7 

In other words, through the expansion of borrowed reserves in the composition of the GIR, BSP operations ultimately depend on loose financial conditions abroad. 

Nevertheless, a tightening of access to local and foreign FX flows will limit the BSP’s capacity to intervene, as evidenced by the growth strains in the GIR relative to the USDPHP. (Figure 7, topmost graph) 

So why shouldn’t the USDPHP rise?

Furthermore, signaling a divergence between a 'genuinely hawkish' Fed and a 'dovish' BSP could lead to a wider yield spread favoring US Treasuries over domestic counterparts, similar to Q4 2020 through Q2 2021, when the USDPHP rose fastest. (Figure 7, second to the highest graph) 

So why shouldn’t the USDPHP rise? 

Here's the thing: The BSP has benefited from the rise of the USD, which has led to revaluation gains from its USD asset holdings. This is evident in its increased reliance on 'investments' while reducing its gold and FX holdings. 

Unfortunately, we don’t have data on the distribution share of the GIR or the BSP’s FX portfolio.

However, with the BSP’s FX reserves accounting for over 70% of its assets, how would a USD "collapse" favor the PHP?

To elaborate, with the BSP’s net worth and capital accounting for only 1.9% and 0.8% of its December 2023 assets, wouldn’t a substantial markdown in its USD portfolio render the BSP insolvent? So, what would the BSP do, print more?

As noted in 2021, (bold original) 

The BSP must amass sufficient FX reserves to match domestic monetary operations required to maintain the de facto US currency reserve standard. Otherwise, with inadequate FX anchor, the peso must fall.  (Prudent Investor, 2021) 

In both cases, why shouldn’t the USDPHP rise? 

All this is owed to the Keynesian policies of 'build and they will come,' predicated on 'spending drives the economy,' which has led to a record shortfall in savings and increased reliance on debt (local and foreign) to fill the funding gap. 

How is this supposed to represent "sound" macroeconomics? 

Why shouldn’t the USDPHP rise? 

IX. Will a Weak Peso Boost Exports While Hampering Imports? 

We are further told by the echo chamber that there is a bright side to the weak peso. 

Or they have been quick to rationalize: a weaker peso would boost export competitiveness and hinder imports. 

Really? 

Data from the Philippine Statistics Authority says otherwise. 

Firstly, from 2013 to the end of 2023, imports have risen alongside the increase in the USDPHP. (Figure 7, second to the lowest image)

Why? Simply put, due to the inadequacy of local production and the political preference to prioritize household consumption—evidenced by the record savings-investment gap. Additionally, interventionist and inflationary policies reduce competitiveness. 

Under such conditions, the bull market in the USDPHP has not hindered import growth. Weak imports in the face of a rising USDPHP have only begun to surface in 2024.

Moreover, while the overall trend in goods exports mirrors the rise of the USDPHP, increasing USDPHP have not necessarily translated to a surge in exports. (Figure 7, lowest chart)

Using reductio ad absurdum, if weak currencies were to deliver an export utopia, why not accelerate the devaluation? Better yet, why not embrace hyperinflation or the utter destruction of the Philippine peso?

The reality is that none of the countries that experienced the worst episodes of hyperinflation—such as Hungary, Yugoslavia, Zimbabwe, Republika Srpska, and others—became export giants during the devastation of their respective currencies. 

The essence is that heuristics do not equate to economics.

Certainly, the weak peso, primarily a result of domestic policies, will have redistribution effects on the economy, and some sectors or enterprises may benefit from it. However, the overall impact is a decline in the standard of living for the general public. 

Why is the USDPHP destined to reach new highs?

Briefly, it's due to the accumulation of economic maladjustments resulting from internal policies.

Figure 8 

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators" 

The markets or the so-called 'speculators' understand this. Unprecedented leveraging raises manifold risks, including interest, currency, and credit risks. (Figure 8, topmost image)

As previously explained, intensified immersion in domestic debt does not serve as a talisman against the 'demon' represented by a crisis. The ventilation of economic imbalances eventually forces them to surface.

Speculators serve as easy scapegoats for a politicized agency meant to protect redistribution policies favoring the government and the elites. Authorities shift the onus onto the source of the imbalances by pointing to the supposed role of "market failure."

Still, why does the BSP not see the rocketing growth in FX deposits? Are they not speculators too? (Figure 8, middle chart) 

Since the penetration levels of the banking system remain far from the levels desired by the establishment, could this buildup in FX deposits primarily be about the elites? Will the BSP crack down on them? 

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System 

Unlike in 2018, when falling CPI coincided with a rally in the peso, the BSP’s ONRRP elevated rate has recently paralleled the rise of the USDPHP. (Figure 8, lowest graph)

If anything, the USDPHP tells us that the inflation genie remains lurking around the corner, yet to wave its magical wand—a third, "bigger" wave of the CPI. 

For the USDPHP, whether 'hawkish' or 'dovish' doesn't matter. 

Rather, the BSP’s inclination towards rate cuts is a response to the softening internals of the GDP and the increasing cost of carrying public and private debt, along with other forms of leverage. 

Finally, while we believe that the USD standard is in its twilight phase, this climax doesn’t necessarily translate to an imminent 'collapse' in the USD.

As illustrated by the BSP’s balance sheet, FX assets (mostly in USDs) comprise the majority.

The USD standard entails that central banks hold assets mostly in USDs.

The transition to a "war economy" implies increased socialization through deficit 'wartime' spending—signifying a global shift towards more inflationary policies in support of war and other war-related agendas. 

This also suggests a diminishing contribution from the private sector. 

That said, as the world realigns along hegemonic lines, nearly every nation would likely follow the US in embracing fiscal dominance—in which inflation becomes a feature, not a bug. 

Moreover, the expanding influence of the "war economy" signifies a transition to a "multipolar" world. 

This transition implies involvement in more aspects—social, economic, monetary, financial, technological, informational, environmental, and tourism-related—leading to increased global economic, financial, and social fragmentation, supply chain dislocations, the formation of economic or trading blocs, and more. 

All of these factors extrapolate to reduced economic efficiencies and higher risks. 

The culmination of the USD standard might also signal a transition towards a "multipolar" monetary system, where the architecture of the currency system of the emerging competitor(s) could be anchored on a basket of commodities. 

While the sequence of realignment of alliances has begun, other developments have yet to materialize. 

As the renowned Credit Suisse analyst Zoltan Pozsar has propounded,

We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves… (Pozsar, 2022) 

____

References

Businessworld, BSP seeks to curb forex speculation, May 24,2024 

Businessworld, Peso hits 58:$1 as Fed stays hawkish, May 21, 2024 

Inquirer.net, BSP chief unfazed by U.S. Fed’s hawkish signals, May 23, 204

Thomas Waschenfelder, The Lindy Effect: Finding Signal In Noise, Wealest.com

Wikipedia, Philippine Peso

World Gold Council, The Bretton Woods System

Anshu Siripurapu and Noah Berman, The Dollar: The World’s Reserve Currency, July 19,2023 CFR.org,

Prudent Investor Newsletter, External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue, December 19, 2021

Zoltan Pozsar, Bretton Woods III, Credit Suisse Economics, bullionstar.com March 7, 2022